The Indian currency has outpaced its Asian matches this year. To this point in 2017, the rupee has gained 6.11% against the US dollar joining the best performing emerging market currencies. In this spectacular performance, rupee returned the highest yield in Asia after six long years of losing streak.
A year ago, Indian rupee was trading around the levels of 68 a piece US dollar. Recently last week when Narendra Modi-led BJP won the state assembly elections in Gujarat and Himachal Pradesh, the rupee strengthened and was quoted 64 against US dollar.
Factors supporting rupee in 2017
- The rupee leaped 1.3% over the last two months, with a major lift coming from mid-November’s rating upgrade for India by Moody’s Investors Service.
- A resounding win for Modi in the nation’s most populous state Uttar Pradesh earlier this year and later in Gujarat and Himachal Pradesh had also triggered gains.
- The Indian currency has also received significant support from RBI’s credible monetary policy and constant hawkish watch on inflation.
- India’s GDP growth rebound to 6.3% in fiscal second quarter July-September from a three-year low in the first quarter also helped rupee to remain strong.
- Strengthening forex reserves helped the rally to sustain. India’s foreign exchange (forex) reserves increased $488.2 million as on December 15.
RBI predicts that inflation is at a risk of rising. Hence, in 2018, RBI is not expected to slash interest rates to stimulate growth. Generally, higher interest rates mean a corresponding rise in the currency as they attract more inflows of foreign capital that are seeking to exploit higher returns. The pressure not to cut rates provide some support to the rupee.
However, a certain section of the market is expecting otherwise. “INR was very strong in 2017 driven by strong FDI flows, significant interest rate differentials and a suppressed Current Account Deficit. 2018 should be a year of moderate depreciation. The first quarter is usually strong so depreciation bias is likely from April 2018. Full year depreciation could be 2-4%,” says market expert Sandip Sabharwal.